Sometimes when volatility jolts financial markets, the safest trades can quickly morph into dangerous bets.
That’s what’s happening now in some corners, as investors spooked by the bank crisis and central-bank uncertainty crowd into big-tech stocks and highly rated corporate bonds. The rush for defensive assets has made both so expensive relative to history that they could be prone to painful reversals.
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Legal & General Investment Management and RBC Wealth Management are among funds retreating from a blistering rally in tech stocks. Goldman Sachs Group Inc., meanwhile, has identified a cheaper and safer strategy in low-volatility stocks.
“That is the danger now, to get fully into defensive and buy overpriced assets,” Frederique Carrier, head of investment strategy at RBC Wealth Management, said in an interview. “Defensive sectors have become somewhat pricey and that is why we are not 100% up-in-quality.”
Across the spectrum of recessionary outlooks, from those who expect a soft landing to those bracing for a hard one, money managers have been gravitating to quality to shelter from the economic fallout of the collapse of three US banks and the government-sponsored bailout of a fourth in Europe.
The quality-heavy top 20 largest stocks in the S&P 500 have driven the stocks rally since the beginning of the year, with the index currently trading at a price-to-sales ratio above the dot-com-bubble’s peak. Similarly, in Europe, quality defensives are trading at around a 60% premium to the Stoxx Europe 600.
Patrick Armstrong, chief investment officer at Plurimi Wealth, just sold out of his position in the luxury giant, LVMH, as he sees too much safety premium being priced into certain quality names. He continues to hold Apple Inc. and Alphabet Inc. but sees risk of a period of “dead money” where it takes a long time for performance to catch up with trading multiples.
Read the full article here by Alice Atkins, Advisor Perspectives.
